Investment philosophy A number of investment beliefs drive our asset allocation in the deliberate absence of any pre-determined strategic guidelines.
1. Sufficient liquidity must be maintained to avoid the forced sale of assets at distressed prices. However, real assets offer the best long-term growth prospects and provide protection against inflationary pressures.
2. In order to maximise investment returns from global economic activity, the portfolio should be very broadly diversified with no innate geographical bias.
3. We seek to utilise the advantages of our long-term investment horizon, our ability to tolerate high levels of short-term volatility, our AAA balance sheet and our proactive governance structure.
4. The best returns will be driven by combining aligned partnership with the strongest external managers and building in-house resource to own selected assets directly.
5. We are flexible as to the nature of the vehicles in which we invest, whether public companies or private partnerships.
Figure 16 Asset allocation by currency (net of currency forwards) (%)
As at 30 September
US Dollar Total Asia Total Europe Japanese Yen Total commodity Other Pound Sterling
1.3 0.2
Overlay capital management Our in-house overlay capital management activities are used to manage risk and to seek to enhance returns, largely through the use of derivatives.
Between March and July 2011, as we became concerned that stock markets had become overly optimistic about economic developments, we sold $850 million of equities; some of this was moved into managed futures’ hedge funds and some was reinvested in equity markets during the sell-off in August and September. We also took advantage of higher market volatility and more pronounced option skew to sell individual stock put options.
We also manage our foreign exchange positions actively to reflect our fundamental view on the economic outlook. Positions in Euro and Yen remain largely hedged; we hold long-term positions in a number of stronger currencies to offset the impact of negative real interest rates in our core currencies of British Pounds and US Dollars. Outside these, at the end of the year, net positions exceeding £100 million were held in the Swiss Franc, Hong Kong Dollar, Korean Won, Singapore Dollar, Taiwanese Dollar, Polish Zloty, and Canadian Dollar.
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